China is using a $50 billion (£31 billion) bond deal with the International Monetary Fund (IMF) to expand the global reach and influence of its currency in what analysts say could be a potentially huge development in Beijing’s campaign to internationalise the “redback”.
For the first time, China will be using its own currency, the yuan, to buy IMF bonds — a move that senior economists confirmed as part of an accelerated programme by Beijing to “project the yuan around the world”.
In one scenario, it could use yuan to lend to some member countries, which might take their yuan back to China where they could be exchanged for a freely convertible currency such as the US dollar. But in another, said Wengsheng Peng, a Barclays Capital economist, the borrowing country might keep the Chinese currency and use it to buy goods from China.
“It potentially helps to promote the use of yuan as an international or even reserve currency,” he said, “although the involved amount is not large, it could send a significant signal. Some central banks who borrow from the IMF will end up holding yuan for albeit a brief period. Also, China may reach an agreement with the borrowing country on using yuan to pay for imports from China. This would help to promote the use of the yuan for trade invoicing and settlement.”
via Times Online.
At this point it is worth looking back on history:
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
But what could replace it[the dollar]?-
What indeed? Hu Jintao might have a few ideas…